Record payouts for drug industry fraud but profits trump penalties

Last November, when GlaxoSmithKline (GSK) first announced that it had reached a $3 billion settlement with the federal government to resolve allegations of fraud stretching back over a decade, the response on Wall Street was revealingly muted, with the company’s stock actually rising following the announcement. Les Funtleyder, health care strategist with the New York brokerage firm Miller Tabak, captured the sentiment on Wall Street succinctly in an interview with The New York Times: “This is a well-worn path for big pharma.”

Indeed, as a new Public Citizen report released last week shows, settlements like GSK’s have become so commonplace that investors have come to accept billion-dollar payouts for fraud as an “innate risk” of investing in the drug industry. The report documents that, since 1991, the industry has paid out more than $30 billion in 239 different settlements with the federal government and the states to resolve a wide range of fraud allegations.

While this may seem like a large sum, consider that $30 billion represents just over two-thirds of the profits of the top 10 drug companies in a single year (2010). The illegal activities alone likely generate much more in profits than are forked over in penalties years down the road. Also worth considering is the severity of the allegations that result in the payouts.

The companies have been accused of, or plead guilty to, such violations as overcharging state Medicaid programs for drugs, sometimes at 6,000 percent markups, and illegally marketing medications for unapproved, off-label uses for patients, even children and the mentally ill, whom the drugs will not benefit, and may actually harm.